Predicting business failure in the hospitality industry: an application of logit model

The phenomenon of business failure has attracted research interest in finance literature partly because of its impact on the U.S economy. Whereas an impressive body of knowledge has been accumulated on this subject thus far, the hospitality literature has lacked empirical studies that seek to explain the nature of this phenomenon in the hospitality industry.

The restaurant industry has consistently had the most business failures of any single segment within the retail trade sector in the eighties. Therefore, there were three purposes in this study: 1) to develop a model for predicting business failure which can be a useful tool in helping researchers and industry practitioners to identify warning signs of business failure in the restaurant industry, 2) to determine whether the financial variables of a predictive model for business failure in the restaurant industry are the same as in the hotel industry, and 3) to determine whether the financial variables that are associated with reorganization are different from those that are associated with liquidation in the restaurant industry.

The sample consisted of 23 failed and 23 non-failed restaurant firms, and 15 failed and 15 non-failed hotel firms within the period of 1982-1993. The predictive business failure models were developed through logistic regression analysis employing 8 financial variables based on one year prior to business failure.

The models were tested at two and three years prior to business failure. The empirical evidence illustrated that the business failure model developed for the restaurant industry is capable of predicting business failure, and even bankruptcy with high classification accuracy.

The relationship between reorganization and liquidation was investigated through logistic regression analysis employing two sets of indicators for capital structure and profitability. The sample consisted of 14 reorganizers and 10 liquidators from the restaurant industry.

The empirical evidence showed that reorganization and liquidation are not dependent on each other, that is, reorganization and liquidation cannot be determined by both Capital structure and profitability in the restaurant a failed [end of author-provided abstract].